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Life Insurance

Insurance companies deny over 5,000 life insurance beneficiary claims every year in America. The Los Angeles Times 2010 article “Flaws can cancel life insurance—after death,” says that based on data it compiled from the National Association of Insurance Commissioners, over the last decade the amount of money life insurers withheld from beneficiaries more than doubled, to $372 Million, in 2009.

While a number of claims are wrongly denied, valid reasons for insurers to deny claims include:
  • Unpaid premiums
  • Suicide
  • Beneficiary fraud
  • Material misrepresentation
  • Failure to follow claim requirements
  • Material misrepresentation is the top reason for claim denial.
What is material misrepresentation? Insurance companies base prices of premiums on risk assessment that involve calculating how long a group of people will live, the amount of interest the insurance company can earn by investing its premiums, and company operating expenses. Underwriters use the facts provided by applicants to calculate risk assessment when underwriting policies.

Material misrepresentation or concealment is a false statement or omission of material fact. In legal terms, a “material fact” is an important fact that can affect a case determination. As it applies to a life insurance policy, had the insurer known the material fact at the time of application, it would have resulted in policy denial. The material fact is an indication to the insurer that underwriting the policy is not viable for the company. Examples of material misrepresentation include withheld or untruthful information about—
  • Pre-existing medical conditions
  • Smoking or drinking habits
  • Dangerous occupations
  • Dangerous hobbies
  • Age (significantly older or younger)
  • Actual income
  • The existence of other insurance policies
Under Texas Insurance Code: Section 705.051 a misrepresentation in an application for a life, accident, or health insurance policy does not defeat recovery under the policy unless the misrepresentation:
  • Is of a material fact
  • Affects the risks assumed
In other words, the misrepresentation must be important and substantially affect the risks the insurance company assumes when issuing the policy. Insurance companies regularly use vague questions or check lists that do not request specific information and later claim that the question was not fully or properly answered once a claim is made.

Insurance companies expect their underwriters to do reasonably thorough checks at the time of application to determine whether an applicant qualifies for a life insurance policy. The pricier the policy, the more time is warranted in underwriting the claim, which may involve reviewing applicant and family medical history, employment history, and other information. It stands to reason that diligent underwriting leads to legitimate policies and consequently fewer rescissions (policy cancellations) and denied claims down the road.

Texas rescission law

The days of limitless insurance policy rescissions (or cancellations) are gone in most states, and this offers a more favorable legal perspective for the insured. Prior to states passing rescission limitations, insurance companies could freely issue policies and later rescind them. Today the majority of states, including Texas, have two year limitations on rescission, which means that after two years of paying premiums on a life insurance policy, you do not have to worry about the insurance carrier rescinding your policy.
In addition, Texas has stiff rescission requirements for insurers. Both the Texas Supreme Court and the U. S. Fifth Circuit Court of Appeals have held that an insurer seeking to rescind a life insurance policy must plead and prove five elements1:
  • Actual making of a representation
  • Falsity of the representation
  • Reliance on by the insurer on the false representation
  • Intent to deceive by the insured in making the false representation
  • The materiality of the false representation
To avoid payment of a policy, the burden of proof lies with the insurer to prove the insured’s intent to deceive, which is a significant challenge.

Legal help for fulfilling the purpose of life insurance

The purpose of life insurance is to guarantee a certain quality of life to your beneficiaries after you die by providing them with life insurance income. If you believe your loved one honestly provided all the facts and the insurance company is wrongly denying your claim as a beneficiary or wrongfully rescinded a policy, get legal help. If your insurance carrier denies your claim and gives material misrepresentation as the reason, an experienced lawyer can review your situation to determine validity and defend your rights under Texas insurance law. Many denials of life insurance benefits are invalid. Call 409.835.3521 or contact a life insurance attorney at Bush Lewis online today for a free consultation to discuss your life insurance claim.

1 Lee v. Nat’l Life Assurance Co. of Can., 632 F.2d 524, 527 (5th Cir. 1980); Mayes v. Mass. Mut. Life Ins. Co., 608 S.W.2d 612, 616 (Tex. 1980). General American Life Insurance Co. v. Martinez, 149 S.W.2d 637, 640–41 (Tex. Civ. App.—El Paso 1941, writ dism’d judgm’t cor.).

Know This Before An Accident

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